The Perils of Shorting: A Real Life Example

Andrew365 said:
Brendan, I hope your punt pays off.

I notice that you have not been able to state what specifically in Tesla's financials indicates to you that the shareprice will decline, that let you to decide to short. Also you have not indicated a timeline for this investment? With the vagueness provided this allows you to be always right if the share price actually declines, for example if Musk announces tomorrow that he has built a rocket to send him to Mars next month and the shareprice falls would you claim a victory? What I am saying, is if the shareprice falls for whatever reason you will claim a victory but if the share price increases, it is a mania and the market is wrong?

In terms of the floor you have set indicates a 63% price decrease. I want to highlight that is a shock of -63%, this is over double what the Federal Reserve stress Equities under a Severely Adverse (Worse than 2008 Financial Crisis) in stress testing. That shock of 30% can be thought of as a 6 month move in Equity prices. The 63%, I have not done analysis but I would suggest that is 1-2 year move, implying you are going to keep the position open for 2 years. Can you clarify how long you think it will take Tesla to go to $200?

There are two options for a move to $200 / -63%
1. There is a market wide decrease in Equities + Idiosyncratic under performance by Tesla. This would still require a significant decrease in the wider Equity market. If this is your belief then hedge your equity portfolio.
2. This decrease is a purely idiosyncratic event contained to Tesla only and no market contagion. In the case of an event causing a 63% decrease in share price, it is probably going to go to 0.

In summary you might as well set the level to $0 or actually set it to a level that is actually achievable from general price corrections.
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I have not looked into Tesla share price in any detail but the 12 month low is 178.97 and the 12 month high is 537.32. That doesn't make Brendan's floor look stupid. You mention the FED stress test but that test is based on the market, not an individual share. Ask the fed what their stress test would be for a bank holding a huge position in a single share and ask them if a 63% price decrease is ludicrous.....
 
Andrew365 said:
Referring to me? I would not short Tesla, but there are plenty of large investors shorting it for what I am sure is there own well researched reasons and they have hedged accordingly, and have exact profit targets.

I think Brendan's rational for shorting is nothing more than a gamble. Hence why he has set floors at $200 and $1000 randomly.
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I was referring to Brendan
 
Sunny said:
I have not looked into Tesla share price in any detail but the 12 month low is 178.97 and the 12 month high is 537.32. That doesn't make Brendan's floor look stupid. You mention the FED stress test but that test is based on the market, not an individual share. Ask the fed what their stress test would be for a bank holding a huge position in a single share and ask them if a 63% price decrease is ludicrous.....
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I built a model for an idiosyncratic stock event based on a large holding and 63% was not the number :).

Tesla has been range bound between ~250 to ~400 through 2017 to mid 2019. It then dropped to a low of 187 and has rebounded to 500. The market has also gone up 30% in that time, so roughly Tesla has outperformed the market by 30%. In order to fall back to 200 it would be viable that the entire market also falls 30%. I did indicate a 67% would be a 1-2 year move.

I really need Brendan to comment on his timeline and whether he thinks the move to back to 200 is a Tesla specific event and the rest of the market remains flat. In that case I standby that for a 67% move on Tesla only the issue would be significant enough that the company is likely done.


Sunny,

As an afterthought, my point 1 in the post was meant to indicate that a 63% move is valid given a wider market decrease plus the idiosyncratic move of Tesla. However, the point I was trying to stress is that Brendan is shorting Tesla as an isolated idiosyncratic move of 67%, that is what I don't believe valid without the company probably going bust.
 
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Andrew365 said:
I really need Brendan to comment on his timeline and whether he thinks the move to back to 200 is a Tesla specific event and the rest of the market remains flat. In that case I standby that for a 67% move on Tesla only the issue would be significant enough that the company is likely done.
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Exactly. Brendan is not making a falsifiable claim if he's not giving a timeline.

Ultimately the value of every security will fall to zero so if you're not giving a timeline you are not saying anything meaningful.
 
Folks

I cannot provide a timeline as I cannot predict the madness of crowds.

In my opinion, Tesla is way overvalued. I fully accept that it could still double in value. I am prepared to lose 100% of 1% of my portfolio, which is why I put that at risk.

I have no illusion that I might lose all this money.

It's quite possible that I might have to close my position and then the Tesla share price subsequently collapses.

In my opinion the price is driven by mania. Look at the earlier comment here to show how some people can completely lose touch with reality.

Andrew365 said:
Uber and Peloton are both disruptors and have offered a top notch product that as an active user of both, I can't see the companies not existing simply because they aren't profitable.
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So people who think that profits don't matter are pushing up the price of Tesla because of the hype and those who have looked at the numbers are shorting it.

I think that the odds are in my favour but that is all.

It is not like Bitcoin which is worth zero and will eventually be priced at zero. But it's like Bitcoin in that it is driven by mania, and by any analysis.

And there is an element of luck in it. I considered it way overvalued at the start of November but I had to close out my position as I need the cash to pay my tax bill. I was steeped. I decided to short it about 10 days ago, but as I was on holidays for a week, I decided to wait until I came back so I would not be checking the price all the time. Again I was steeped.

If Tesla falls to $200, I will not be claiming some extraordinary insight.

It is a small part of a diversified portfolio of shares. That is all it is.
 
I don't know enough about Tesla one way or another and I don't have up to date figures. Quick google is showing a
historic implied volatility of between 40-60% and is climbing again this month. I applaud anyone brave enough to make a call one way or another. Like I said previously, I would be very wary of shorting a stock in this market though.
 
Brendan Burgess said:
In my opinion the price is driven by mania. Look at the earlier comment here to show how some people can completely lose touch with reality.



So people who think that profits don't matter are pushing up the price of Tesla because of the hype and those who have looked at the numbers are shorting it.
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Brendan you have taken my comment out of context, which is ok if you need to do that to support your gamble.

I am not an investor in Peloton, Uber or Tesla, but I am an active user of Peloton and Uber. My view is the valuation of companies is changing, this is proven by UBER who have 100 million users a month but have yet to make a profit. These are high growth companies that are not going to be profitable for a period of time, but just because they are not currently profitable does not mean they are going to fail. You also have to remember the largest shareholders in these companies have already likely made multiples on their initial investment, so maintaining not being profitable can run longer.

I am actually just really surprised that you are so certain but have yet to provide one shred of evidence to support your rational.

The first rule of investing is don't invest in what you don't understand. You have taken a gamble and I think you should call it that. Or by all means share your analysis and maybe we will agree.

Note, I have never said what way Tesla is going to go, but if I was in your position I would be setting my profit taking much closer to 25%.
 
Andrew365 said:
It is a sign of the time that we should not rely on traditional valuation metrics to understand the true value of the company. Look at Twitter or Netflix for example, in the early years analysts look at the number of new users etc. Many new companies are loss making, for example of the IPOs last year to sample UBER and Peloton, both are loss making and Uber even said they may never be profitable. However, Uber and Peloton are both disruptors and have offered a top notch product that as an active user of both, I can't see the companies not existing simply because they aren't profitable.
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How can I say that I took your comments out of context?

You have clearly said that "I can't see the companies not existing simply because they aren't profitable"

Maybe you meant something else, but this is what you said.

Look lads

We had these exact same conversations during the dot.com bubble. People were buying shares in any company that added .com to their name. When those of us using traditional valuation metrics of profitability and cash flow pointed out that this was irrational, we were told that we were old fashioned.

A share price must reflect the company's future profitability and cash-flow or its break-up value.

No wonder how useful Uber is if it never makes a profit, it will close eventually.

Brendan
 
Uber has a large user base. The last time I checked it makes a loss of about $1 per ride.

To me this doesn't seem unreasonable in the context of building market share. Once established and a mature brand that people trust, there is plenty of scope for increasing prices.

Also, when mature it won't invest as much in R&D.
 
Everything said here was said during the dotcom bubble. Everything. Markets don't change. Bubbles happen. Bubbles get forgotten. Bubbles happen again.

By the way, property prices in Bulgaria are currently yielding over 10%...…...
 
Sunny said:
I have not looked into Tesla share price in any detail but the 12 month low is 178.97 and the 12 month high is 537.32. That doesn't make Brendan's floor look stupid. You mention the FED stress test but that test is based on the market, not an individual share. Ask the fed what their stress test would be for a bank holding a huge position in a single share and ask them if a 63% price decrease is ludicrous.....
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You beat me to it. I think if my bank's assets were 100% in Tesla shares I wouldn't be too impressed by the Fed's 30% stress test.
 
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My understanding of the various theories on rational markets is that we assume that all relevant information is available to the market and it is only fresh info that will shift the market price, subject of course to a bit of random supply and demand noise. The persistent daily increase in the Tesla share price over the last few weeks in the absence of a flow of news suggests to me an element of irrationality at play. I won't be shorting though because as folk have remarked the market could stay irrational for longer than my nerves can stand.
 
Have no interest financially in Tesla. However, I do believe EV are the future andTesla are leaders and a long way ahead of the pack and will move up and beyond 1k mark.
 
Brendan Burgess said:
OK, so I have shorted Tesla at $536.

I have set myself a stop at $1000. In other words, if it doubles in price, I will close my position at a loss. My exposure is in the order of 1% of my portfolio.

I have set myself a limit of $200. In other words, I will close my position if it falls to $200.
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I am considering taking out a short as well, just in a slightly different way. The day before the next earnings (mid Feb i believe) selling a $0.06 spread bet with a 10% guaranteed stop loss, by my reckoning i'm risking roughly $350 if the share price goes up 10% and the guarantee got triggered.
 
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